Energy policy etc…

The one energy market intervention Theresa May should announce

Theresa May has indicated she’s gearing up to intervene in retail energy markets, despite warnings from many experts and former energy regulators. She’s stuck to some extent between a rock and a hard place. If she does nothing she is criticised by the tabloids for failing to protect consumers. If she intervenes, for example with a price cap of some sort or limits to standard variable tariffs, she is likely to reduce competition in the market and prices will be higher in the long run. This is against the backdrop of widespread public dissatisfaction with energy markets, despite the fact that competition is increasing and small suppliers with innovative products are launching almost weekly.

I’d like to present one solution that would solve a bunch of problems at once for Theresa May – announcing a shift away from environmental subsidies appearing on utility bills and onto general taxation. There are so many good reasons to do this:

It would allow the government to legitimately argue they will be reducing energy prices, and could justifiably regulate to ensure that the reductions in costs to suppliers are reflected in equal reductions in bills. Even if this wasn’t put in place through regulation, it is likely that the market would deliver this.

There would be no decreased incentive to switch supplier away from the big-six, the potential cost savings would remain the same. Competitive forces would still continue to drive innovation and cost-reduction in the industry.

It is a more equitable funding mechanism for renewables. General taxation is raised progressively. Passing costs onto bills was not a progressive distribution of costs as energy use doesn’t vary much with income.

It can solve the Levy Control Framework fiasco, a policy which is simultaneously unable to adequately support (from a decarbonisation perspective) or sufficiently limit (it’s purpose) investment in renewables.

It is more consistent with the subsidy mechanism preferred by government, the contract for difference, and would allow government to more freely pursue decarbonisation policies without concerns of increasing bills. It is also consistent with the policy of a more directed industrial strategy, focus on investment in infrastructure and less of an obsession with deficit reduction compared to the previous government.

It is supported by plenty of academic evidence suggesting that the ‘supplier hub’ model for delivering decarbonisation, promoting energy efficiency and reducing fuel poverty is deeply flawed.

Nothing would need to happen right away – and it could even be phased in gradually to shift individual programs over one by one.

This is an easy win for the government; lower bills and increase their ability to invest in new energy projects such as the Swansea Bay Tidal Lagoon. The only down side? It might not be popular with the Treasury… but presumably they owe Theresa May a favour after the NICs debacle.